The interest applicable for various products varies depending upon various parameters. One of the deciding factors are the availability of underlying or collateral security. The interest charged on secured loans are much lower than that charged for unsecured loans.
Now we must understand what a secured loan means. A secured loan is one when the creditor has some other assets provided by the borrower as a security to fall back upon in case the borrower defaults in repayment of the loan.
For example, when a person avail a home loan or a car loan, his asset is mortgaged or hypothecated to the lender till he has repaid the whole amount. In case, he defaults in his repayment, the lender may sell the house or car under SARFAESI Act (The Securitisation and Reconstruction of Financial Assets and Enforcement of Security Interest Act) and utilize the sale proceeds to recover its dues.
While, if someone has availed a personal loan or education loan without offering any security and has defaulted in repayment, the lender will have no other way to recover the dues other than legal proceedings. For the above factor, interest charged on home loans and car loans are much lower than that of personal loans and education loans.
Banks often offer loans against their own fixed deposits. This is a fully secured loan and the interest rate can be as low as 1%.
